Social Website Dysphoria

Web 2.0 Or Dot-Com Bubble 2.0?

Pick a random social website of your choice and ask yourself (or, well, Google for it!): how much money do they make?

You’ll quickly see the answer: they’re not telling.

Ok, that’s probably not so terrible, specially because many of those will tell you how much they grow and how often they’re mentioned on the media.

Or will they? Every time I prepare myself for another presentation, I go through Google in search of hard numbers. I’m naturally spoiled by Linden Lab, who keep pushing all kind of data about Second Life, so much that we get easily lost, and we always complain that we haven’t got the really interesting numbers…

But let’s take Facebook as an example. They’re one of the nicest ones, since at least they publish their statistics. Well, of course, there is no way you can know if they’re right or not (who audits them?), but, again, this is just me being spoilt, because so many people publish statistics about Second Life and engage the Lindens in serious discussion about their own numbers. I mean, we have Meta Linden coming in-world on his Office Hours to get attacked by the residents because the “numbers are not right”, and people show them “proof” that “Linden Lab is lying with numbers” all the time. Surprise, surprise, Linden Lab actually shows pretty accurate numbers over time — they might just choose to interpret them differently, and that is always cause for discussion, of course.

For the sake of the argument, however, let’s assume that Facebook is not lying about their numbers, neither are their lying about their timeline. However, you might notice on that webpage a typical trend of popular social website companies: they will always tell you how much money they’ve raised in funding capital, but never how much money they make.

So, is Facebook a profitable company? How do you know?

Let’s look at some hints. From 2004-2006, you have no clue what Facebook was doing to get revenue. On 2006, you get a hint: “Facebook and Microsoft form strategic relationship for banner ad syndication”. Aha! So that’s where the money comes from! Googling for that didn’t return anything really interesting — just oh so many articles on how Facebook grew and grew, on how many active users change their status every day and add a lot of apps and new friends, and so on. Lots and lots of “coolness” factors, but — nothing about business.

The “banner ad syndication”, an add-on after two whole years not selling anything, seemed to have been fruitful, though: on October 2007, “Facebook and Microsoft expand advertising deal to cover international markets; Microsoft takes a $240 million equity stake in Facebook”

Double-Aha!

Soooooooo, to recap. For two years, Facebook was basically just burning capital. Then they approached Microsoft and told them how cool they were and how many millions of active users they had. Microsoft — suddenly amnesiac about the dot-com bubble — nods and says, “hey, cool, we can sell ads then!” and builds a “strategic partnership”. And after another two years, they are willing to pay US$240m for a share of Facebook — cleanly paying off all investments by the venture capitalists, for a huge profit (total investment was $40 million, and a bit was sold for US$240m — not bad!).

What happened since then? Has Facebook, under the Microsoft umbrella, thrived and prospered, and is now an increasingly profitable company, making the shareholders of Microsoft happily rich?

All right, wait. This is a “Plan B”-type of company. One thing that I should explain about Plan B is that… things have changed since the bubble burst.

Companies don’t always get bought by megacorps because they’re profitable. In fact, when you’re a megacorp, your biggest problem is — paying as little taxes as possible, because your profits are way too huge.

The best way to do so is to invest in more companies — so you’ll cut out the investment costs out of the taxable revenues. However, when you’re a megacorp with a huge exposure to the media, you have to be extra careful, or the stockmarket will go haywire. Investing in a company means less money to be spread among the shareholders on that year — although good investments will mean more money on subsequent years — so usually the shares drop after a big investment is announced. On the other hand, a big investment on a cool company might actually make the shares go up — after all, you might lose a bit this year, but you’ll cover up the losses on subsequent years.

What the megacorps have found is something new. I’m not sure about what happened during the Web 1.0 days, but the Web 2.0 days are quite more interesting. When Google bought YouTube for US$1.63b., people couldn’t understand why they spent so much money on it (after all, Google had their own video site, Google Videos, although, granted, it was not so big…). After a lot of Googling, I found out that around June 2007, someone posted a spreadsheet with a lot of data about YouTube. Apparently, the estimated revenues from Google AdSense — the only sort of revenue YouTube had; “pro” accounts came later — were less than half a million US$ monthly. YouTube’s infrastructure costed up to five times that amount! So they were one of the least lucrative companies on the Internet. So why did Google buy it!?

Well, of course, Google has its own infrastructure, which mostly means that they could reduce the costs to a more tolerable amount by placing YouTube on their own data centres. However, this still doesn’t make YouTube a lucrative venue. It has grown and grown in terms of users and bandwidth needs, far beyond what Google can ear from the few ads they manage to sell there…

Actually, and to take Google’s example… none of their venues generate any profit at all!

The only lucrative business that Google has (besides the share market!) is Google AdSense. But it’s so lucrative that it pays for everything else, and Google is still lucrative even when figuring out the losses on all their other venues!

Not surprisingly, Microsoft is not much different. Allegedly, from all their product lines, only two products are lucrative: Windows and Office. All the rest are things “they have to have” to be able to, well, keep the status quo of the world’s largest and most profitable software house. But… they only lose money on all other products and services.

“Losing” US$240m. on Facebook is a bargain. They can afford it. It was way cheaper than YouTube! And I’m sure that Facebook is running under Microsoft’s new Azure cloud computing technology, which is one of the best ways to test it anyway. They need those kinds of things to test 🙂

As said… Facebook is actually one of the most informative companies. If you try to find equivalent information on Twitter — who don’t even sell ads! — let me know. All the rumours I’ve found just point to Twitter selling profiling data to some huge megacorps. That’s a bad idea, as we saw during the Web 1.0 dot-com bubble days: if Twitter starts losing too many users to competing technologies, the megacorps will look for better profiling data. And what happens if Twitter can’t sell itself before that? (Yes, of course, they’ve avoided Google’s offer, but… was that wise?)

You can start now going through all those hundreds of thousands of social websites, and ask yourself the same question every time: how do they make money?

And if you can’t answer it, you’ll know they’re just hanging in there, burning venture capital, until it runs out, and patiently waiting for plan B — that Microsoft, Google, Yahoo, or AOL buys them. If none of these will, they will disappear.